TOOLS OF THE TRADE – Kalipa Mafungo’s – ‘POWERS OF AN ARBITRATOR UNDER SECTION 12B (4)(a) OF THE PETROLEUM PRODUCTS ACT 120 OF 1977’ – December 2023

POWERS OF AN ARBITRATOR UNDER SECTION 12B (4) (a) OF THE PETROLEUM PRODUCTS ACT 120 OF 1977[1]

INTRODUCTION

  1. The Constitutional Court (CC) recently had occasion to pronounce on the ambit of s 12B (4) (a) of the Petroleum Products Act 120 of 1977 (the PPA) in the matter of Mfoza Service Station (Pty) Ltd v Engen Petroleum Ltd and Another.[2]
  2. The CC’s justices were split six to three.  The majority[3] found that the arbitral model introduced by s 12B (4) (a) of the PPA was never intended to deal with claims of compensation, i.e., to award damages.[4]  On the other hand, the minority[5] found that awarding compensation would be an effective remedy to correct an unfair or unreasonable practice; that damages are aimed at serving a corrective role and, consequently, an award of compensation qualified as a corrective measure within the scheme of s 12B (4) (a).[6]
  3. The decision of the majority explicitly excludes, or appears to exclude, from the ambit of s 12B (4) (a) the possibility of any scenario in which an award could ever validly include the granting of damages or compensation as a necessary measure to correct an unfair or unreasonable contractual practice.  The minority’s decision stands in contradistinction given their acceptance that the awarding of compensation would be an effective remedy to correct an unfair or unreasonable practice.[7] 
  4. The question arises whether, on any conceivable set of facts, it is incompetent for an arbitrator, under s 12B (4) (a) to issue a monetary award for damages or compensation in favour of an aggrieved party to correct an unfair or unreasonable practice?  ASSESSMENT
  5. In Mfoza the majority specifically referred to s 33 (1) of the Arbitration Act 42 of 1965 (the Arbitration Act) which limits the grounds of review to those founded on misconduct, illegality and impropriety in obtaining the award.[8]  Although not specifically referred to, section 33 (1) (b) of the Arbitration Act also makes provision for the review of an arbitrator’s decision where she or he has acted ultra vires.
  6. The arrangement contemplated in s 12B of the PPA includes a referral or submission stage that is provided for s 12B (1), and a subsequent arbitral stage provided for in s 12B (2).  For a licensed retailer or wholesaler of petroleum products to qualify for any relief contemplated in s 12B they are required to allege an unfair or unreasonable contractual practice perpetuated or committed by the other party (either the retailer or the wholesaler).[9]
  7. Once the aggrieved party makes the requisite allegations in his or her referral, the necessary jurisdictional facts exist for the Controller of Petroleum Products (the Controller) to require by notice in writing, that the parties submit the referral to arbitration.[10]
  8. S 12B (2) of the PPA provides that: –‘An arbitration contemplated in subsection (1) shall be heard—(a)
    by an arbitrator chosen by the parties concerned; and(b)
    in accordance with the rules agreed between the parties.’
  9. In the event that the parties are unable to agree on an arbitrator or the rules of the arbitration within fourteen days of the receipt of the Controller’s notice referred to in s 12B (1), the Controller may appoint a suitable person to function as an arbitrator.  The arbitrator is empowered to decide the rules that are to apply to the arbitration.[11]  
  10. The majority in Mfoza found that the PPA only provided for limited grounds of review without an appeal procedure.  They stated that this consideration implicated ‘… the equality-before-the-law guarantee, as well as the right of access to courts found in s 34 of the Constitution’,[12] which militated against attributing to s 12B (4) (a) the wide meaning to include a compensatory award, as contended for by Mfoza.[13]
  11. S 40 of the Arbitration Act provides that:‘This Act shall apply to every arbitration under any law passed before or after the commencement of this Act, as if the arbitration were pursuant to an arbitration agreement and as if that other law were an arbitration agreement: Provided that if that other law is an Act of Parliament, this Act shall not apply to any such arbitration in so far as this Act is excluded by or is inconsistent with that other law or is inconsistent with the regulations or procedure authorised or recognised by that other law.’
    (My emphasis).
  12. The point of departure in applying the Arbitration Act to an arbitration conducted under any law passed since its promulgation, is that the Arbitration Act would apply to such an arbitration as if it were being conducted pursuant to an arbitration agreement, and as if that other law were the arbitration agreement.  In other words, it might also have found application in Mfoza unless the PPA itself excluded its application or it otherwise was found that the PPA’s provisions are inconsistent with the application of the Arbitration Act.  
  13. The import of this s 40 of the Arbitration Act does not appear to have been applied in Mfoza, since the majority found that the arbitral system contained in section 12B of the PPA does not constitute arbitration by agreement.[14]  Absent the exclusion of the Arbitration Act in the PPA or an inconsistency between the PPA and the Arbitration Act, rendering s 40 of the Arbitration Act inapplicable, it is submitted that it is indeed applicable to the PPA; and, that any arbitration carried out under the PPA will be done consequent to it being deemed an arbitration agreement, with s 12B thereof serving as the arbitration agreement.
  14. The decision in Independent Municipal and Allied Trade Union v Northern Pretoria Metropolitan Substructure and Others 1999 (2) SA 234 (T) (IMATU) lends support to this position.  S 40 of the Arbitration Act is applicable to statutory arbitrations unless specifically excluded.[15]  Section 12B of the PPA does not exclude the application of s 40 of the Arbitration Act to arbitral disputes brought under s 12B (4) (a).  At first instance, i.e., prior to any review taking place, it is not uncommon that the jurisdiction of the court to deal with a particular issue is ousted during the arbitral process.[16]  The court (per Van Dijkhorst J) found that this applied to ordinary consensual contracts referred to arbitration, and stated further – albeit obiter but nonetheless persuasive – that in his view it was equally appropriate in the case of a consensual contract that includes a statutory requirement to arbitrate.[17]
  15. S 12B (1) of the PPA envisages that grievances referred to the Controller by licensed retailers[18] or licensed wholesalers[19] may be referred to arbitration.  Both licensed retailers and licensed wholesalers consent in the general conditions applicable to their respective licenses to comply with the PPA and the relevant regulations.  In applying for a retail or wholesale license, such licensees are in effect consenting to the PPA regulatory regime, which includes the arbitral mechanism provided for in s 12B of the PPA.  A retail or wholesale licensee would therefore be similarly placed to a contracting party to a consensual contract – such as the one contemplated in IMATU – which includes a statutory requirement to arbitrate.
  16. If we are to adopt this premise (which I submit should be the case), then it does not matter whether the arbitration was preceded by the Controller’s requirement that the parties submit to arbitration or that the parties concluded an arbitration agreement voluntarily amongst themselves.  The PPA, via s 12B thereof, would serve as the arbitration agreement with the arbitration commencing pursuant thereto.  The arbitration agreement would be binding on the parties thereto, only being susceptible to termination by consensus between the parties or on application to court upon good cause being shown by one of the parties thereto.[20]
  17. Thus, there would be no question of a party to the arbitration agreement, which follows the route of referral and arbitration in terms of s 12B (1) and (2), being deprived of a right of appeal by resolving a dispute within that regime.  A party to a referral and arbitration would be placed in the same position and have the same rights as any other party to an arbitration, who is also subject to the Arbitration Act. 
  18. It was held in Business Zone[21]  that a single equitable standard of fairness and reasonableness prevails in all petroleum contracts irrespective of whether the dispute between the parties is subject to court proceedings, as opposed to statutory arbitration proceedings.[22]  Extrapolating on this principle, this single standard ought to apply equally to any proceedings which are subject to the Arbitration Act. Parties to a dispute referred to arbitration via the PPA are no more entitled to a right to appeal a decision in which an Arbitrator has acted ultra vires than parties to an arbitration occasioned via a purely contractual referral which is not underpinned by a statutory obligation or requirement. 
  19. A party to a s 12B arbitration is in the same position as any other party to an arbitration.  In other words, such a party has the right to challenge an arbitrator’s jurisdiction for various reasons, including that he or she acted ultra vires by granting an award beyond their jurisdiction, or where such an award goes beyond correcting an unfair or unreasonable practice. 
  20. To interpret s 12B (4) (a) of the PPA to include the competency of an arbitrator to make a monetary award, would only trigger a review of the arbitrator’s award in the event of him/her awarding monetary compensation where such award goes beyond correcting an unfair or unreasonable practice, i.e., where the arbitrator issued an award ultra vires.  Where such an award is made against a party to a s 12B arbitration, the aggrieved party’s redress would be to review the arbitrator’s award and under section 33 (1) (b) of the Arbitration Act and not to challenge same by way of an appeal.  Such an interpretation would therefore not deprive an aggrieved party of the appropriate remedy available to it to challenge a decision of an arbitrator which it disagrees with.
  21. It is therefore of no consequence that an aggrieved party, against whom an award to pay compensatory damages to a referring party has been made, may not be able to appeal the award.  The aggrieved party’s rights are sufficiently safeguarded by s 33 (1) (b) of the Arbitration Act, which permits the review of such a decision to the extent that it goes beyond correcting an unfair or unreasonable contractual practice. 
  22. The issue concerning equality before the law[23] in respect to a party’s right to appeal (i.e., in instances where proceedings were instituted in a court of law), as opposed to the absence of such a right in the case of a s 12B arbitration (i.e., where the arbitrator’s award is final and binding in terms of s 12B (5)), would thus fall away and not militate against imputing a wide arbitral power to the arbitrator to award compensation.  Once the Controller requires that the parties submit to arbitration, and the arbitration commences after the election of an arbitrator under s 12B (2), or under s 12B (3) at the election of the Controller, the parties are deemed to have agreed to the arbitration with the PPA serving as the arbitration agreement.
  23. Section 12 (4) of the PPA provides that: –‘An arbitrator contemplated in subsection (2) or (3)—(a)
    shall determine whether the alleged contractual practices concerned are unfair or unreasonable and, if so, shall make such award as he or she deems necessary to correct such practice; and(b)
    shall determine whether the allegations giving rise to the arbitration were frivolous or capricious and, if so, shall make such award as he or she deems necessary to compensate any party affected by such allegations.’(Own emphasis).
  24. In the majority judgment in Mfoza[24] reference is made to the case of AmaBhungane Centre for Investigative Journalism NPC and Another v Minister of Justice and Correctional Services and Others; Minister of Police v AmaBhungane Centre for Investigative Journalism NPC and Others[25] with the following question being posed:[26] ‘… whether the power to award compensation under section 12B (4) (a) is necessary without hollowing out the PPA as a whole, rendering the section inoperable?’
  25. The majority found that an ancillary implied power did not arise as the primary power of the arbitrator to correct an unfair or unreasonable contractual practice could be given effect to without relying on a power to award compensation under s 12B(4)
    (a).[27]      In effect what the majority found, was that it was not necessary or an incidence of the arbitrator’s (ancillary implied) power to correct an unfair or unreasonable practice (primary power) that he or she be required to award compensation.  A correction of an unfair or unreasonable practice could be made and awarded by the arbitrator without exercising any (ancillary implied) power to make a compensatory or damages award. 
  26. S 12 (4) (a) imposes a power on the arbitrator that obliges him/her to – 
    1. determine whether the alleged contractual practices are unfair or unreasonable; and
    2. make such award – i.e., once he/she has determined that the alleged contractual practices are unfair or unreasonable – as he/she deems necessary to correct the practice.
  27. The arbitrator’s powers are peremptory.  These are the two steps which s 12B (4) (a) enjoins the arbitrator to perform.  This may be characterised as a primary power.  As described in AmaBhungane, a primary power is:[28]‘… a power to do something required to be done in terms of an Act and which does not owe its existence to, or whose existence is not pegged on, some other power; it exists all on its own. That is what makes it primary, and not ancillary’
  28. Once an arbitrator finds and determines a practice to be unreasonable or unfair, they must make an award that they deem necessary to correct the practice.  This is the primary power the arbitrator has.  The question asked by the majority in Mfoza was whether, consequent to this primary power, an ancillary implied power vested in an arbitrator to award compensation following a positive finding of an unfair or unreasonable contractual practice.  The majority found in the negative.[29]  An ancillary implied power was described in AmaBhungane as:[30] ‘An ancillary implied power arises where a primary power – whether express or implied – conferred by an Act cannot be exercised if the ancillary implied power does not also exist.’
  29. Accepting that an arbitrator’s power to award compensation was correctly characterised as being an ‘ancillary implied power’ – i.e., a power incidental to the primary power of granting such award they deem fit to correct the unfair or unreasonable contractual practice – their primary power to make such a determination and grant an appropriate corrective award surely must be incapable of being carried out or exercised meaningfully without the associated (and, hence, necessary) ancillary implied power to award compensation. 
  30. Although, on the facts pleaded in Mfoza, such an implied power was found not to exist, questions arise as to what would happen in the following instances: 
    1. A licensed retailer consistently dishonours its payment obligations toward a licensed wholesaler in the terms of a fuel supply agreement causing the licensed wholesaler to refer an unfair contractual practice under s 12B (1).  An arbitrator is appointed, and an award is handed down by him/her one year after such referral was made.  The parties agreed to maintain the status quo pending the outcome of the arbitration.  If the arbitrator finds in favour of the aggrieved party that an unfair or unreasonable contractual practice existed, could it conceivably be considered that it is beyond the arbitrator’s jurisdiction (in correcting the unfair or unreasonable practice of dishonouring payment obligations) to award the shortfall in payment made to the licensed wholesaler over the previous year (i.e., retrospectively up to the time of the referral) together with an additional award that the licensed retailer is also required to fully honour its payment obligations going forward (from the referral prospective up to the time of the award)?
    2. A licensed wholesaler arbitrarily imposes additional surcharges on a licensed retailer, not provided for in the fuel supply agreement, causing the licensed retailer to refer an unfair or unreasonable contractual practice to the Controller.  Under threat of its fuel supply being withheld, the retailer pays the additional charges for twelve months until an award is made by an arbitrator appointed under s 12B of the PPA.  If the arbitrator subsequently finds that an unfair or unreasonable contractual practice was committed by the wholesaler in levying the additional charges, would it be beyond the arbitrator’s jurisdiction (in correcting the unfair or unreasonable practice of arbitrarily imposing additional surcharges) to award the retailer monetary compensation to make him or her whole in respect of the extra amounts paid to the wholesaler during the preceding twelve months (retrospective to the award) together with an additional award declaring that the wholesaler is obliged to desist from imposing such surcharges in future (prospective to the award)? 
  31. If the answer to these questions is that the arbitrator necessarily has the power to award monetary compensation to correct the envisaged unreasonable or unfair contractual practice(s), then such power would in these circumstances be an implied ancillary power vested in the arbitrator.  Effectively, an incidence of the arbitrator’s primary power to correct an unfair or unreasonable contractual practice. POWERS BESTOWED ON ARBITRATORS
  32. Although imbued with the potential to persuade, obiter dicta are not binding.  This honour is reserved for the ratio decidendi of a judgment.[31]  This legal truism was observed by Wilson AJ (as he then still was) in Lehana’s Pass Investments CC v Africa Campus Trading 300 (Pty) Ltd and Others.[32] 
  33. In my view Wilson AJ correctly pointed out that the Supreme Court of Appeal’s (SCA) assessment of section 12B of the PPA in Engen Petroleum Limited v The Business Zone 1010 CC t/a Emmarentia Convenience Centre[33] was obiter.  This being so, the assessment made by the SCA did not constitute a binding precedent required to be followed by the High Court.  In the assessment of s 12B undertaken by the SCA in the latter a distinction was drawn between s 12B (4) (a) and s 12B (4) (b) of the PPA.  The distinction thus sought to be drawn was that the latter section (i.e., s 12B (4) (b)) conferred a compensatory remedial jurisdiction on the arbitrator while the former (i.e., s 12B (4) (a) conferred a corrective remedial jurisdiction.[34]
  34. The import of the distinction being that corrective remedial jurisdiction (as opposed to  compensatory remedial jurisdiction) provided for under s 12B (4) (a) only posits a prospective remedial jurisdiction.  In other words, such prospective remedial jurisdiction could only find application within an extant contractual relationship.  Once a contract is terminated, such corrective measures are no longer available to an aggrieved party.  The aggrieved party’s remedy then lay in a possible damages claim that falls beyond the purview of s 12 of the PPA and within the domain of the courts.[35]  By virtue of the remedial jurisdiction being prospective, an award of monetary compensation for past unfair or unreasonable contractual practices would therefore fall outside of an arbitrator’s jurisdiction.  
  35. According to the SCA’s rationale in Business Zone-SCA, a referring party to arbitration under s 12B (4) (a) could not seek an award that would amount to retrospective relief for the past unfair or unreasonable conduct of the party who was the subject of the complaint.  A retailer would be precluded from claiming compensation or damages for loss suffered as a result of past unreasonable or unfair practices since such claims address past conduct and not the relationship between the parties going forward.  This obiter statement was not dealt with or addressed by the CC on appeal.[36] 
  36. Wilson AJ held in Lehana’s Pass that:[37] ‘There is no reason why, in exercising an equitable jurisdiction to make “such award as he or she deems necessary to correct” an unfair or unreasonable contractual practice, an arbitrator cannot award compensation in an appropriate case. An appropriate case would be one in which the award of damages would have the effect of correcting the unfair or unreasonable practice.’
  37. One of the pillars relied on by Wilson AJ[38] in reaching this conclusion, was the unanimous judgment in Crompton Street Motors CC v Bright Idea Projects 66 (Pty) Ltd,[39]  where the CC found – i.e., after drawing parallels between private contractual arbitration and statutory arbitration (in the context of s 12B of the PPA), and comparing the relative expediency of arbitration to the rigidity of litigious processes before ordinary courts – without any distinction being made between ss (4) (a) and (b) of s 12B that:[40]‘Although the above was said in the context of private contractual arbitration, it applies equally to statutory arbitration in terms of section 12B, which must be understood as arbitration ordinarily is in the law of contract. The benefits of arbitration outlined in Lufuno are evident from the text of section 12B itself and were considered in Business Zone. Among others, the parties can choose both a specialised arbitrator and the rules of procedure which that arbitrator is to follow; the arbitrator has wide remedial powers to remedy the unfair or unreasonable contractual practice and make compensatory awards’(My emphasis)
  38. This reading of s 12B (4) which affords the arbitrator wide remedial powers to remedy an unfair or unreasonable contractual practice and make compensatory awards is conceptually consistent with an interpretation of s 40 of the Arbitration Act, which provides for arbitration under section 12B of the PPA to be conducted as if such arbitration were conducted pursuant to an arbitration agreement with the PPA (section 12B) being regarded as the arbitration agreement or clause.  Since the PPA does not explicitly exclude the application of s 40 of the Arbitration Act this is a fortiori the situation. 
  39. For these reasons it appears, with respect, that the majority decided Mfoza incorrectly in applying a blanket exclusion under s 12B (4) (a) of the PPA and by chiselling out any possibility of a monetary award being made to correct an unfair or unreasonable contractual practice.

[1]       Authored by Kalipa KM Mafungo, attorney, notary public & conveyancer.
[2]       2023 (6) SA 29 (CC).
[3]       Per Kollapen J (with Majiedt J, Mathopo J, Theron J, Tshiqi J and Unterhalter AJ concurring).
[4]       Mfoza, supra, at paras [61], [69] and [70].
[5]       Per Mhlantla J (with Madlanga J and Mlambo AJ concurring).
[6]       Ibid., at paras [89] and [91].
[7]       Ibid., at paras [90] and [91].
[8]       Ibid., at para paragraph [65].
[9]       S 12B (1) of the PPA
[10]     Business Zone 1010 CC t/a Emmarentia Convenience Centre v Engen Petroleum Limited and Others (CCT09/16) [2017] ZACC 2; 2017 (6) BCLR 773 (CC); 2017 JDR 0259 (CC) (9 February 2017) at paras [60] and [61].
[11]     S 12B (3) (b) of the PPA.
[12]     Mfoza at para [65].
[13]     Ibid., at para [66].
[14]     Ibid., at para [67].
[15]     Independent Municipal and Allied Trade Union v Northern Pretoria Metropolitan Substructure and Others 1999 (2) SA 234 (T) at p. 237H – J.
[16]     Ibid., at p. 238H – J.
[17]     Id.
[18]    See Regulations regarding Petroleum Products Site and Retail Licences Published under GN R286 in GG 28665 of 27 March 2006 as amended by GN R1061 in GG 35984 of 19 December 2012 – regulation 22 (3) (f) (i)
[19]     See reg 12 (3) (h) (i) of the Regulations regarding Petroleum Products Wholesale Licenses published under R287 in GG 28665 of 27 March 2006 and as amended by GN R1062 in GG 35984 of 19 December 2012.
[20]    S 3 (2) of the Arbitration Act.
[21]    See footnote 10 above.
[22]    Business Zone at para [52].
[23]    Mfoza at paras [58] to [62] and [65].
[24]    Ibid., at para [52].
[25]    2021 (3) SA 246 (CC).
[26]    Mfoza at para [53].
[27]    Id.
[28]   AmaBhungane at para [69].
[29]   Mfoza at para [53].
[30]   AmaBhungane at para [63].
[31]    Turnbull-Jackson v Hibiscus Court Municipality and Others 2014 (6) SA 592 (CC) at para [56].
[32]    (16138/2021) [2022] ZAGPJHC 912; 2022 JDR 3452 (GJ) at para [17].
[33]    (20513/2014) [2015] ZASCA 176 (27 November 2015).
[34]    Business Zone-SCA at para [23].
[35]    Business Zone-SCA at para [23].
[36]    Lehana’s Pass at para [16].
[37]    Ibid., at para [19].
[38]    Ibid., at para [21].
[39]    2021 (11) BCLR 1203 (CC); 2022 (1) SA 317 (CC)
[40]    Crompton at para [45].

Leandré Jacobs

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